On 22 January 2026, the Luxembourg Parliament (Chambre des Députés) adopted Draft Law No. 8590 introducing a competitive carried interest regime as from fiscal year 2026 with the ambition to attract front and middle office employees to Luxembourg.
Key features
The new regime covers two distinct forms of carried interest, the ones resulting from contractual arrangements and the participation-based ones. Main changes to the voted text compared to the initial filling (see our previous Newsflash) pertain to the scope of eligible beneficiaries.
Eligible beneficiaries
The new regime significantly expands the scope of eligible beneficiaries beyond the previous limitations to alternative investment fund managers (“AIFM”) employees. After amendments during the legislative process, the following persons are now eligible: (i) individuals exercising management functions as employee, partner, manager or director with managers, management companies or alternative investment funds; or (ii) individual service providers involved in the management of an alternative investment fund under a consulting services agreement, concluded directly or through one or more entities.
The commentaries clarify that the first condition requires the individual to contribute to the management of the AIF, notably portfolio management and risk management.
Contractual arrangements
The contractual arrangement grants a participation in the fund’s “outperformance” exclusively based on a profit-sharing arrangement and the beneficiary is not required to acquire or hold an interest in the AIF. Such arrangement grants specific rights over the fund’s net assets and income and the outperformance corresponds to the performance exceeding a pre-determined hurdle rate.
The remuneration under these types of carried interest will be subject to a quarter of the global tax rate applicable to the taxpayer (i.e., up to 11,45% for 2025).
Participation based arrangements
The participation-based carried interest covers two forms: (i) the above-described contractual interest concluded with the requirement to hold a direct or indirect participation in the AIF and (ii) where the individual can acquire a participation in another vehicle entitling the holder of said participation to a carried interest.
The remuneration representing the carried interest is not considered as a taxable income if received more than 6 months after the investment (unless it represents a participation in a corporate entity exceeding 10% of such entity). Income resulting from the participation and not representing the carried interest remains subject to the ordinary tax regime.
The legal form of the investment vehicle is also neutral for the taxation of the participation based carried interest at the level of the beneficiary. This is a welcomed simplification removing complexities resulting from the tax transparency of partnerships or mutual funds that could complexify the tax qualification at the level of the carry beneficiary and its tax compliance obligations.
Key takeaways
This updated regime brings legal certainty and flexibility to adapt to the various forms of carried interest met in practice and removes key limitations from the previous regime.
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